J. Safra Sarasin: Preference for high-quality bonds
Due to high core inflation, the Federal Reserve and major central banks continue to raise interest rates. A US recession is expected to occur in the fourth quarter of this year or the first quarter of 2024, leading to a further global economic slowdown. So states private bank J. Safra Sarasin in its Outlook for the second half of the year.
In this current macroeconomic environment, JSS prefers high-quality bonds and sees attractive opportunities in emerging markets.
“The Federal Reserve has completely turned its focus on inflation,” says Martin Fenner, Managing Director Global Wholesale at JSS. “Inflation does get lower, but it is still above the Fed’s target level. That is at 2 per cent. This gives Fed chairman Powell no choice but to raise US interest rates again. This is likely to happen twice before the end of the year. In doing so, the Fed will ensure the inevitable recession. That will happen in the last quarter of 2023 or in the first quarter of 2024.”
Slow growth or economic contraction
According to Fenner, investors should prepare for a long period of high interest rates. This will result in slow growth or economic contraction. “We would like to re-emphasise the attractiveness of bonds in these circumstances. Many investment managers are positive about this asset class because of its high returns. Bonds are back on track. We at JSS are cautious, though. Due to uncertain macroeconomic conditions, we prefer high quality bonds to manage credit risks.”
JSS also has a preference for emerging market bonds in their own currencies. Emerging countries are likely to benefit from lower inflation and a weaker dollar, according to JSS.
Economic conditions favourable for fixed income
“We believe that bonds are very attractive at current interest rate levels. Economic conditions are also currently very favourable for fixed income. This creates opportunities for investors,” states Monika Netelenbos, Fixed Income Product Specialist at JSS. “The JSS Sustainable Bond – Total Return Global fund has a good balance between income generation and strong potential for upside price appreciation, especially in light of the expected economic slowdown. The fund has great diversification. It focuses on high quality sovereigns and companies with strong fundamentals, participating in secular trends such as the energy transition, digitalisation or demographics.”
